Iain Stewart, manager of the Newton Real Return Fund, said the US economy and company profit numbers need to pick up soon if the enthusiasm now built into share prices is to be validated. If not, investors could be in for a rough ride later this year.
“US policy continues to set the tone for financial markets globally,” Stewart said. “Consensus expectations for the economy are overwhelmingly bullish; expectations for equities are if anything even more bullish as despite the tapering of the current QE programme, the monetary authorities continue to provide a ‘put’ in the form of more stimulus, should the economy falter,” he added.
Stewart further explained that the “euphoria” in equity markets seems to be discounting a return to robust economic growth and normalisation of interest rates. Consensus forecasts for the US now predicting 3% annualised growth in the fourth quarter of 2014.
Tapering of asset purchases is reinforcing this despite the Fed’s claim that tapering is not tightening, Stewart explained. With the quantitative easing underpinning markets, even the perception of a withdrawal of liquidity support by the Fed could present problems for equity markets, he cautioned.
Stewart suggests going long on US treasuries as a way to hedge against the dangers he sees in equity markets. “We remain broadly positive on US long bonds in the expectation that rates will not rise in a parallel fashion along a yield curve which is already very steep,” Stewart said. “Moreover, in multi-asset funds, we see long treasuries as a useful and cost-effective hedge against risk asset positions, rising geopolitical risks and the deflationary risks which we continue to see,” he added.
Stewart also recommends investors target what he calls “haven qualities” when picking stocks and bonds such as stability, balance sheet strength, low leverage, high barriers to entry, global diversification, and low beta to economic activity.
